Conventional wisdom suggests that the European debt crisis—which led to severe adjustment programs sponsored by the European Union (EU) and the International Monetary Fund (IMF) inGreece, Ireland, and Portugal—was caused by fiscal profligacy on the part of peripheral or noncore countries and a welfare state model, and that the role of the common currency (theeuro) along with the Maastricht Treaty (1992) was, at best, minimal.
In particular, the Germanview, as Charles Wyplosz (2010) aptly named it, is that a solution for the crisis involves theeurozone’s Stability and Growth Pact (SGP). The alternative view, still according to Wyplosz, isthat a reform of EU institutions is needed in order to impose fiscal discipline on the sovereignnational institutions, since a revised SGP would be doomed to fail.Both views, which dominate discussions within the EU, presume that the problem isfiscal in nature. In both cases, the crisis is seen as in traditional neoclassical models—in whichexcessive fiscal spending implies that, at some point, economic agents lose confidence in theability of the State to pay and service its debts, and force adjustment. Excessive spending alsoleads to inflationary pressures, which would be the reason, in this view, for the loss of externalcompetitiveness and not the abandonment of exchange rate policy implicit in a commoncurrency. In other words, the conventional view implies that the balance of payments position isthe result of the fiscal crisis.Finally, the conventional story also relegates financial deregulation to a secondary placein the explanation of the crisis.
The idea is that if countries had balanced their budgets andavoided the temptation to create a welfare state, then excessive private spending would not have
The euro was initially introduced as an accounting currency on January 1, 1999, replacing the former EuropeanCurrency Unit (ECU) at a ratio of one-to-one. The euro entered circulation on January 1, 2002. Seventeen out of 27member states of the European Union use the euro as a common currency. These are: Belgium, Ireland, France,Luxembourg, Austria, Slovakia, Germany, Greece, Italy, Malta, Portugal, Finland, Estonia, Spain, Cyprus, the Netherlands, and Slovenia. Among these, Austria, Belgium, France, Germany, and the Netherlands are referred toas core countries. Greece, Ireland, Italy, Portugal, and Spain are referred to as nonccore or peripheral countries. Themember countries of the European Union which have not adopted the euro are Bulgaria, the Czech Republic,Denmark, Latvia, Lithuania, Hungary, Poland, Romania, Sweden, and the United Kingdom.
See Soros 2010 for a different view. Soros understands the European Crisis as a banking rather than a fiscal crisis.More recently Soros (2011) has argued that the European Crisis is a by-product of the 2008 Crash which forced thefinancial system to “substitute the sovereign credit of governments for the commercial credit that had collapsed”(Soros 2011). From here, it follows that the crisis made
the health of
the European Banks fall prey to the state of European public finances. Note also that, in spite of the blame placed on lax government finances, there is broadrecognition that European governments have injected significant bailout packages into the financial sector, and thatthis was necessary. As of September 2011, available data for Ireland, Greece, and Spain show that governments’support to the financial sector net of its estimated recovery amounted to 38 percent, 5.4 percent, and 2.1 percent of their respective GDP. See IMF 2011a.